Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend versus a common stock with no dividend but a 16% capital gain.The corporation's tax rate is 35%.Assume 30% tax rate on dividends.The:
A)common stock returns 2.60% more than preferred.
B)preferred stock returns 0.34% more than common.
C)common stock returns 2.32% more than preferred.
D)returns are equal on an after-tax basis.

Question

Quizplus · Accepted Answer

The after-tax return on preferred stock is 8.4% (12% - 30% of 12%). The after-tax return on common stock is 10.4% (16% - 35% of 16%). The preferred stock returns 0.34% more than the common stock.

Compare the After-Tax Returns for a Corporation That Invests in Preferred